US Punitive Measures Against Saudi Arabia Over Khashoggi Likely To Prove Limited In Scope

The Trump administration appears likely to impose further punitive measures against Saudi Arabia over the coming weeks in connection to the killing of journalist Jamal Khashoggi inside the Saudi Consulate in Istanbul.

We believe such measures will ultimately prove limited in scope, due to Saudi Arabia's vast strategic and economic importance to the US.

That said, an escalation, although unlikely, cannot be ruled out completely.

US Options For Punitive Measures Against Saudi Arabia

Source: Fitch Solutions

The US looks set to implement selective punitive measures against Saudi Arabia in connection to the killing of Saudi journalist Jamal Khashoggi inside the Saudi Consulate in Istanbul on October 2 (see 'Quick View: Khashoggi Disappearance Risks Undermining Saudi Diversification Efforts,' October 12). The US Trump administration is under substantial pressure from Congress to express disapproval of its Saudi counterpart’s handling of the case by implementing such measures. Indeed, the administration has already barred 21 Saudi nationals suspected of being involved from entering the US and announced further measures will likely be forthcoming. We believe these could potentially include a widening of targeted sanctions against Saudi suspects; temporary delays in military transfers to the Saudi government; and temporary reductions in US diplomatic staff based in the kingdom.

We see limited scope for more permanent and disruptive US measures at this stage. This view is primarily underpinned by the US’ reliance on Saudi Arabia in a few key areas:

The US needs Saudi Arabia - the world’s largest oil producer by some margin - to ensure global oil markets remain relatively stable. This matters especially as the Trump administration looks to counter Iran and re-impose US secondary sanctions on Iranian oil exports. Should Saudi Arabia refuse to help substitute Iranian barrels coming off the market by boosting its own production, then US consumers would be negatively affected, weighing on Trump’s popularity at home in the run-up to mid-term elections.

The US also depends on Saudi Arabia in connection to other core strategic and military policies, including countering terrorism; safeguarding regional sea lanes crucial to global trade and oil market stability; protecting Israel; and maintaining influence in the Middle East vis-à-vis competing global powers such as Russia and China.

Finally, Saudi Arabia is by far the US defence sector’s largest external customer, and also a major source of investment for the US government and businesses more broadly.

These dynamics suggest that the economic- and security-related risks to the US of implementing severe punitive measures against Saudi Arabia far outweigh those associated with maintaining the status quo, even despite intense pressure from elements of Congress.

Nevertheless, an escalation - while unlikely - cannot be ruled out completely. Were for example any evidence to emerge pointing to major transgressions by Saudi Arabia’s top leadership in connection to the case, then a more comprehensive US response could materialise. Alternatively, should the Saudi leadership retaliate aggressively against the US’ implementation of selective punitive measures, then this could also provoke a stronger US counter response (although we highlight that there is nothing to suggest a substantial Saudi retaliation is on the cards at this stage - on the contrary, the Saudi leadership appears to be making significant efforts to defuse the situation). Strict US measures against the kingdom could take the form of a step-up of the aforementioned targeted and diplomatic sanctions; more disruptive delays to military transfers; and economic and financial sanctions.